In this article I will explain why we at Dow Experts Finance have recently increased our exposure in our corporate investment portfolio to Gold by buying into the SPDR Gold Shares (GLD) trust, what our economic projections are for 2022 and why we believe that investors need to be highly cautious in the coming months.
The last more than a decade has been defined by a generally loose monetary and fiscal policy with artificially low interest rates, Quantitative Easing (QE), falling bond yields and consistently rising stock prices. We discussed all of these components, their inter-correlation and dependence in our detailed macro analysis published back on June 29th, 2021, where we accurately predicted the strong appreciation of the USD in the 2nd half of 2021, despite the fact that the broad consensus in the market at the time was for a weaker US dollar throughout 2021.
You're welcome.
Now, it’s time for us to share with you our analysis and thoughts on where we see the global economy, interest rates, inflation, bonds yields and of course stock prices heading in 2022. We believe that having the right macro economic framework and understanding of how leading economic forces and indicators affect the demand for money as well as goods and services globally is essential for being successful as an investor in these highly complex times. Being able to recognize major trends, correlations and structural changes allows you to efficiently optimize and re-balance your investment portfolio in a way that will ultimately help you to stay one step ahead of the market.
Today's analysis will focus exclusively on Gold, as we will be releasing our full macro investing outlook for this year in the coming weeks and we don't want to overlap too many things between the two articles. At any rate, our full macro investing outlook paper will present you with a much deeper dive, showing you where we see the best trading and investing opportunities in 2022 and beyond.
The Technical Set-Up
Apart from the great cup and handle technical formation on the monthly chart, which is a strong BULLISH continuation pattern, GLD is also expected to receive a meaningful boost from a weakening US DOLLAR and the elevated levels of inflation that we expect to see in the US moving forward.
The Cup & Handle technical pattern currently in play has been forming since the lows at around $40/oz set all the way back in 2005. As you can see on the chart below the price action has been characterized by a sharp price rise in Stage 1; a corrective phase with the formation of a broad base, Stage 2; another strong rally (Stage 3) taking the price back to the highs reached in Stage 1; a minor profit taking correction (Stage 4). This is a textbook set up for a meaningful multi-year rally for Gold, especially considering the fact that it is on the monthly chart.
The new mandate of the Fed
The Federal Reserve has shifted its growth mandate to a price mandate at the end of 2021, which means that achieving price stability and lower inflation readings is now a more important goal than chasing growth and pushing equity markets higher with artificially low interest rates and generally loose monetary policy conditions.
So, what does that mean?
It means that in the event of a sharp correction in the US equity markets caused by the expected strong tightening in monetary policy conditions, the Fed will be less likely to jump in to the rescue of equities by lowering the benchmark interest rates and resuming its QE program (as it did back in March of 2020). Reason being, such actions would simply throw gasoline in the inflation fires in the economy.
The current environment
- We have highly inflated US equity markets sitting at all-time highs;
- A weakening US Dollar with a descending triangle formation on the monthly chart with 4 rate hikes already priced in for 2022, thus leaving it a very limited fundamentally supported upside from here. In case the Fed is unable to complete all 4 interest rate hikes in 2022 and/or interest rate expectations start shifting for whatever reason, the US dollar will experience a major sell-off.
- A high inflation up until now mainly driven by supply-chain bottlenecks, which is expected to stay relatively high in the foreseeable future.
- The weakening US Dollar will further increase the inflation in the US economy for the following reasons:
Import prices will rise causing a degree of imported inflation
The rise in aggregate demand from cheaper exports
The fall in the value of the dollar may reduce the incentives for firms to cut costs because they get an ‘easy’ improvement in competitiveness. Therefore, a fall in the dollar may harm long-term competitiveness.
- A hawkish Federal Reserve with a price mandate instead of a growth mandate
- Unfavorable demographic trend with the highest ever number of people expected to leave the workforce in 2022 (baby boomers retiring).
Conclusion
We believe that the Federal Reserve is already way behind the curve with its tapering and tightening efforts as it is still technically injecting liquidity into the market with over $60 billion worth of assets bought this month alone.
Moving forward, after concluding its tapering process in March, 2022 the Fed will make an attempt to catch up with the running inflation, but will still be somewhat limited in terms of the actual pace of policy tightening as they would not want to sent the economy into a deep and prolonged recession. Furthermore, with the excessive amounts of credit injected into the system over the last few years, the Fed is well aware that if asset prices collapse dramatically, that would mean that the collateral of these record levels of public and private debt will go down, reducing personal wealth and making it much more difficult for borrowers to service their loans. In addition to that, if inflation stays relatively elevated for prolonged periods of time that will also eat away from the purchasing power of consumers, thus making their wages and earnings less valuable.
So we might be heading towards an economic environment where, asset prices come down as a result of tightening of monetary policy conditions, rates go up but fail to completely subdue the raging inflation as they are simply starting from a very low level (0.25%) and will take the Fed a long time in order to get them back above 2% or higher. This would then lead to a further erosion in the purchasing power of the end consumer, thus lowering the Aggregate Demand in the US economy and lowering the Real GDP moving forward.
On the other hand, the current demographic mix and the millions of people expected to leave the workforce this year, together with the continuous technological innovation present in the economy are both going to exercise their respective deflationary pressures moving forward. We hope that these developments could also help the Fed in the fight against inflation putting somewhat of a natural lid to how high inflation could rise in the long run.
We believe that the economy would eventually self-correct and stabilize in the long run, but we will definitely have to go through a period of economic contraction in order for that to happen.
Gold is widely considered as a safe-haven asset, which tends to outperform in times of uncertainty, volatility and lower GDP growth, thus making it an attractive asset for 2022 and beyond!
Follow & Copy us @DowExperts on eToro for more detailed market analyses, profitable trading ideas and a consistent portfolio performance!
The last more than a decade has been defined by a generally loose monetary and fiscal policy with artificially low interest rates, Quantitative Easing (QE), falling bond yields and consistently rising stock prices. We discussed all of these components, their inter-correlation and dependence in our detailed macro analysis published back on June 29th, 2021, where we accurately predicted the strong appreciation of the USD in the 2nd half of 2021, despite the fact that the broad consensus in the market at the time was for a weaker US dollar throughout 2021.
You're welcome.
Now, it’s time for us to share with you our analysis and thoughts on where we see the global economy, interest rates, inflation, bonds yields and of course stock prices heading in 2022. We believe that having the right macro economic framework and understanding of how leading economic forces and indicators affect the demand for money as well as goods and services globally is essential for being successful as an investor in these highly complex times. Being able to recognize major trends, correlations and structural changes allows you to efficiently optimize and re-balance your investment portfolio in a way that will ultimately help you to stay one step ahead of the market.
Today's analysis will focus exclusively on Gold, as we will be releasing our full macro investing outlook for this year in the coming weeks and we don't want to overlap too many things between the two articles. At any rate, our full macro investing outlook paper will present you with a much deeper dive, showing you where we see the best trading and investing opportunities in 2022 and beyond.
The Technical Set-Up
Apart from the great cup and handle technical formation on the monthly chart, which is a strong BULLISH continuation pattern, GLD is also expected to receive a meaningful boost from a weakening US DOLLAR and the elevated levels of inflation that we expect to see in the US moving forward.
The Cup & Handle technical pattern currently in play has been forming since the lows at around $40/oz set all the way back in 2005. As you can see on the chart below the price action has been characterized by a sharp price rise in Stage 1; a corrective phase with the formation of a broad base, Stage 2; another strong rally (Stage 3) taking the price back to the highs reached in Stage 1; a minor profit taking correction (Stage 4). This is a textbook set up for a meaningful multi-year rally for Gold, especially considering the fact that it is on the monthly chart.
The new mandate of the Fed
The Federal Reserve has shifted its growth mandate to a price mandate at the end of 2021, which means that achieving price stability and lower inflation readings is now a more important goal than chasing growth and pushing equity markets higher with artificially low interest rates and generally loose monetary policy conditions.
So, what does that mean?
It means that in the event of a sharp correction in the US equity markets caused by the expected strong tightening in monetary policy conditions, the Fed will be less likely to jump in to the rescue of equities by lowering the benchmark interest rates and resuming its QE program (as it did back in March of 2020). Reason being, such actions would simply throw gasoline in the inflation fires in the economy.
The current environment
- We have highly inflated US equity markets sitting at all-time highs;
- A weakening US Dollar with a descending triangle formation on the monthly chart with 4 rate hikes already priced in for 2022, thus leaving it a very limited fundamentally supported upside from here. In case the Fed is unable to complete all 4 interest rate hikes in 2022 and/or interest rate expectations start shifting for whatever reason, the US dollar will experience a major sell-off.
- A high inflation up until now mainly driven by supply-chain bottlenecks, which is expected to stay relatively high in the foreseeable future.
- The weakening US Dollar will further increase the inflation in the US economy for the following reasons:
Import prices will rise causing a degree of imported inflation
The rise in aggregate demand from cheaper exports
The fall in the value of the dollar may reduce the incentives for firms to cut costs because they get an ‘easy’ improvement in competitiveness. Therefore, a fall in the dollar may harm long-term competitiveness.
- A hawkish Federal Reserve with a price mandate instead of a growth mandate
- Unfavorable demographic trend with the highest ever number of people expected to leave the workforce in 2022 (baby boomers retiring).
Conclusion
We believe that the Federal Reserve is already way behind the curve with its tapering and tightening efforts as it is still technically injecting liquidity into the market with over $60 billion worth of assets bought this month alone.
Moving forward, after concluding its tapering process in March, 2022 the Fed will make an attempt to catch up with the running inflation, but will still be somewhat limited in terms of the actual pace of policy tightening as they would not want to sent the economy into a deep and prolonged recession. Furthermore, with the excessive amounts of credit injected into the system over the last few years, the Fed is well aware that if asset prices collapse dramatically, that would mean that the collateral of these record levels of public and private debt will go down, reducing personal wealth and making it much more difficult for borrowers to service their loans. In addition to that, if inflation stays relatively elevated for prolonged periods of time that will also eat away from the purchasing power of consumers, thus making their wages and earnings less valuable.
So we might be heading towards an economic environment where, asset prices come down as a result of tightening of monetary policy conditions, rates go up but fail to completely subdue the raging inflation as they are simply starting from a very low level (0.25%) and will take the Fed a long time in order to get them back above 2% or higher. This would then lead to a further erosion in the purchasing power of the end consumer, thus lowering the Aggregate Demand in the US economy and lowering the Real GDP moving forward.
On the other hand, the current demographic mix and the millions of people expected to leave the workforce this year, together with the continuous technological innovation present in the economy are both going to exercise their respective deflationary pressures moving forward. We hope that these developments could also help the Fed in the fight against inflation putting somewhat of a natural lid to how high inflation could rise in the long run.
We believe that the economy would eventually self-correct and stabilize in the long run, but we will definitely have to go through a period of economic contraction in order for that to happen.
Gold is widely considered as a safe-haven asset, which tends to outperform in times of uncertainty, volatility and lower GDP growth, thus making it an attractive asset for 2022 and beyond!
Follow & Copy us @DowExperts on eToro for more detailed market analyses, profitable trading ideas and a consistent portfolio performance!